Affordable Loss Principle
In much of the business world, the manager in charge of launching a new product analyses the market and chooses segments with the highest expected value. It is a natural reflex that is the result of years of training around a single mantra: maximize returns by selecting the optimal strategy for your target. Expert entrepreneurs turn this logic on its head—they think in terms of affordable loss rather than expected returns. They decide what they are willing to lose rather than what they expect to make. Instead of calculating upfront how much money they will need to launch their project and investing time, effort, and energy in raising that money, the effectual entrepreneur tries to estimate the downside and examines what she is willing to lose. The entrepreneur then uses the process of building the project to bring other stakeholders on board and leverage what they can afford to lose together. An estimate of affordable loss does not depend on the venture but on the person. It varies from person to person and even across his or her life stages and circumstances. For the Greenwoods (GoodKaarma article), affordable loss did not permit the use of cash, but did include the use of their old farmhouse. By allowing estimates of affordable loss to drive decisions about which venture to start, entrepreneurs stop depending on prediction. Instead, they focus on cultivating opportunities that have a low failure cost and that generate more options for the future. The combination enables cheap failure and learning that can be applied to the next iteration of the opportunity. This does not mean that entrepreneurs choose projects that won’t cost a lot if they fail—or that they do not expect to make a lot of money. It simply acknowledges that uncertain new venture opportunities are difficult to value upfront, whereas the investment of time, money, and other resources is quantifiable, manageable and controllable.